The Rise and Fall of Mosaic and PotashCorp

I'm glad 2008 is over. But you must admit -- it was quite a trip.

Take the case of PotashCorp (NYSE: POT  ) . Not content with tripling in value in 2007, "POT" kept on growing like a weed in 2008. Before the Great Commodities Bubble Burst this summer, the stock had already grown by another 60%, to cap a 700% price increase over the course of just two years. Meanwhile, peer potash producer Mosaic (NYSE: MOS  ) grew tenfold in value, to rise from about $15 in mid-2006 to better than $150 per share in June 2008.

Then came the plunge. The past six months have brought untold damage down on both stocks. PotashCorp today sits at half of where it started the year. Mosaic is down a good two-thirds -- and investors are understandably upset. They're confused. I know this for a fact, because for the past few months, I've received multiple emails from Fool.com readers asking me, basically, "What the heck is going on?"

Well, I'm far from a potash expert. If you want an educated opinion on where potash prices go from here, and what will happen to profits at the companies that produce the stuff, you'd be hard-pressed to find someone less knowledgeable than I.

But I do have three things necessary to noodle through the problem:

  • A passing familiarity with the laws of supply and demand, and the way cause and effect works.
  • A modicum of common sense.
  • An unsurpassed command of the principles of fifth-grade mathematics.

With these tools at my disposal, I'm willing to tackle the problem, and to explain the rise, fall, and eventual resurgence of Mosaic and PotashCorp.

A cycle begins
Open your Economics 101 textbooks, and turn to the chapter on "Supply and Demand." When demand for food rises, but supply holds constant, the price rises. What's the logical reaction? You don't need to be an ExxonMobil oil exec or an OPEC oil baron to answer that: Producers see high prices for a commodity, and they react in their economic self-interest. They try to grab as much profit as possible by producing more goods.

How? By buying, leasing, and farming more land. And as prices keep rising, producers (farmers) try to maximize the yields on the land they already have. Monsanto (NYSE: MON  ) enjoys a seller's market in Incredible Hulk-brand mutant seeds. Mosaic shareholders cheer, too, as farmers try to maximize yields on these seeds by buying more fertilizer.

However, along about now, farmers notice an unintended side effect of chasing yield: While they've been rolling in fertilizer, the price has begun to stink. Potash and potassium futures are going through the roof -- and farmers raise their prices to compensate for the higher input costs.

Not long afterward, these higher prices begin making themselves felt in the supermarket aisles. General Mills (NYSE: GIS  ) feels pinched as the wheat it needs to make its Wheaties continues to rise in cost, while Coca-Cola (NYSE: KO  ) notices a disconcerting rise in the cost of high-fructose corn syrup ... and back in the kitchens of Suburbia, Dad observes to Mom that this week's grocery bill looks a tad high.

And then, a miracle happens
Or a disaster, depending on your perspective (and, specifically, whether you're a Coke shareholder or an investor in PotashCorp). We don't know precisely what it was. Only that it happened.

And it happened because the immutable law of economics remains: The cure to high prices is ... high prices. At some point, they get so high as to be unsustainable, and "something happens" to upset the balance.

At this point, all of the factors that drove Mosaic and PotashCorp to their dizzying heights of mid-June 2008 begin to work again ... in reverse. PepsiCo (NYSE: PEP  ) has finally raised prices on Fritos as far as it can, and consumers are beginning to pinch their wallets shut.

Demand begins to slide, and with it goes the price of corn. On one hand, Archer-Daniels-Midland (NYSE: ADM  ) breathes a sigh of relief, but on the other, PotashCorp finds it difficult to keep raising prices on its product, because the farmers aren't as eager to sell corn at $4 a bushel as they were at $7.50. Profits stagnate and then slide -- and before you know it, Wall Street analysts who saw no end to this cycle just months ago are now tumbling over one another in their rush to predict lower and lower estimates.

What next?
And now, the question my readers constantly ask me: Will PotashCorp ever get back to $200? Will Mosaic regain $150? My answer is yes. In time.

At some point, another miracle-disaster will occur, because just as the cure to high prices is high prices, the converse is also true: Low enough prices will create demand -- demand for food that exceeds a dwindling supply -- and prices will rise again.

That's why they call it a cycle.

Fool contributor Rich Smith owns no shares of any company named above. PepsiCo is a Motley Fool Income Investor recommendation. Coca-Cola is a Motley Fool Inside Value selection. The Motley Fool's disclosure policy has its ups and downs, but generally speaking, we think it's a pretty good idea.


Read/Post Comments (8) | Recommend This Article (30)

Comments from our Foolish Readers

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  • Report this Comment On December 31, 2008, at 10:28 AM, kingfrogcash wrote:

    It was more likely the supply and demand of speculators.

    The fall of Bear Stearns early in the year crushed the commodities and the fall of Lehman Brothers took out oil.

    Just look at the charts. Granted the Olympics and the completion of their massive infrastructure took ended steel's run. Until the hedge funds regroup with the winners leading, the commodities will actually be usage supply and demand driven.

  • Report this Comment On December 31, 2008, at 6:15 PM, UCLAgrdstnt wrote:

    KingfrogCash

    Very Well put. The potash story looks like a simple potash price bubble that collapsed but it is much deeper that this...

    Potash prices remain near their peaks. There is not enough in the world and the barrier to entry is very high. While some demand for potash and certainly other fertilizer nutrients has occurred this is not at all commensurate with the decline in stock price for the potash companies.

    We had a bubble in hedge fund buying. We had a bubble in speculators. We had a bubble in credit leverage. Thus we had a bubble in stock price. Deleveraging took care of this nicely.

    It just goes to show how dangerous it can be to link earnings and stock price too closely. PE of 5? Who cares?

    The only thing that matters for investors/traders is demand for stocks not for the company itself.

  • Report this Comment On December 31, 2008, at 6:17 PM, UCLAgrdstnt wrote:

    Demand decline

  • Report this Comment On December 31, 2008, at 7:41 PM, TexasLonghorns wrote:

    People have to eat, recession or not, potash mines cost 4 to 5 billion dollars to start. Do the math, they reduce production, demand rises, the potash is till there. They have a monopoly on this stuff. Called a MOAT!

  • Report this Comment On January 01, 2009, at 12:26 AM, dividendgrowth wrote:

    The assumption that it's difficult to open potash mines is laughable.

    The assumption that potash is absolutely necessary for farming is even more laughable.

  • Report this Comment On January 02, 2009, at 12:27 PM, dfl3270 wrote:

    dividendgrowth's understanding of the issues is laughable. Go check it out and see how many $'s it would take to open a new potash mine. And you obviously know nothing about crop production if you think crop nutrients like potash are not needed.

  • Report this Comment On January 03, 2009, at 11:44 AM, 4moreacres wrote:

    As a farmer ( wheat only ), I must take issue with a couple of the statements in the article. First we are price takers not price makers - the markets set our price, we do not get to "raise our price to compensate for higher inputs."

    Second, "buying, leasing and farming more land", the amount of land available for farming doesn't change that rapidly. Some amount of land can switch from one use to another, but land is the one thing we are not making any more of.

    Third, don't feel badly for General Mills. The rise in diesel for transportation cost them a hell of a lot more than the short lived spike in the price of wheat. From an investment standpoint it gave GM the opportunity to raise prices much more than their costs were going up. Look at their past quarter or two and future earnings.

  • Report this Comment On January 03, 2009, at 8:47 PM, wstreet00 wrote:

    Rich Smith, was this article thought through? The title is pretty impressive and enticing. It is eye catching but the body of this work is weak. I own MOS, AGU, and POT and should have sold them 5 months ago. Wish I did. But I did know this would occur, they were not over priced and their EPS was still expected to rise even more sharply.

    Smith never mentioned that people in this world have to eat and the rising middle classes of India and China are still rising. They are eager and hungry and want to eat better. They want their children to eat well. POT is still in the sweet spot and controls a large percentage of fertilizer. Potash is not salt, it is not found every where in large supply.

    This article has a strong title but it's body of goods is paltry. POT still is expected to have higher EPS next year, as is MOS and AGU. Will POT's stock price shoot upward to $200 a share again, it should. It was unfairly punished and they know this. That is why they are buying allot of their stock back.

    Smith, you say prices are too high. What? They are continuing to rise and for good reason. Potash is hard to find and POT controls allot of this supply. This commidity is highly needed and Canpotex is still receiving higher prices for it's product. The title of this article is not supported by the writing.

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